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Is the Xero Limited (ASX:XRO) share price a sell?

The Xero Limited (ASX: XRO) share price has gone up by 89% over the past year and up by 14% over the past month. It’s been a very strong performer and shareholders can be pleased.

However, some people may be wondering if it’s time to sell after the price appreciation.

As a reminder, Xero’s full-year result to 31 March 2018 was very impressive. It achieved an additional 351,000 subscribers to a total of 1.4 million and grew operating revenue by 38%. Plus, the gross margin improved by 4% to 81%.

The following amounts are in NZ Dollars. The operating cash flow improved by $45.6 million to $41 million. The earnings before interest, tax, depreciation and amortisation (EBITDA) improved by $54.6 million to $26 million.

Xero has been the dominant player in New Zealand for a long time, it’s now the cloud accounting leader in Australia. The most pleasing thing for me was that UK revenue increased by 60% to $79.6 million.

However, with around 139 million shares on issue at a current price of $45.50 per share it has a market cap of around $6.3 billion. With operating revenue of $406.6 million it’s trading above 15x revenue, which is quite pricey in anyone’s book.

Craig Winkler is one of Xero’s directors and indirectly owns a lot of Xero shares through Givia, the trustee of an Australian charitable trust. He and his family members are not beneficiaries of the trust.

He plans to sell all of Givia’s assets over 10 years to fund its charitable giving, such as funding health research, literacy and religious education among Aboriginal communities. It’s a wonderful cause and many of Australia’s richest business people would do well to follow his example.

However, if I were Mr Winkler I’d want to sell the Xero shares at the right time for as much as possible for the charity. Therefore, I don’t think it should be much surprise that 700,000 shares were sold in an off-market trade at $45 per share for a total of $31.5 million on Thursday last week and today.

Foolish takeaway

Xero expects to be cashflow neutral with its current cash balance and is going to continue re-investing for growth. Xero is a great business with a number of pleasing attributes like a high retention rate and platform effects. However, I can understand if some people want to lock in some profits at the current elevated price.

If I sold some Xero shares and had some cash to put back into work in the share market, I'd want to consider one of these top growth shares.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of Xero. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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